Eastman Kodak Shares

One of my favorite lines from the Lord of the Rings trilogy is when the wizard, Gandalf, speaking to Frodo about feelings of regret at having to witness difficult times, says, “So do all [people] that come to see such times, but that is not for them to decide.  All we have to decide is what to do with the time that is given to us.”  So it is with the shareholders of Eastman Kodak’s (EKDKQ) common stock.  Ten years ago it was worth over $30/share.  Today it is worth a bit more than $0.40/share. 

We’ve been getting questions about what happens to common stock in bankruptcy.  The answer is that it’s possible there might be some value left to the stock in bankruptcy, but it’s pretty unlikely.  Common Shareholders come last in bankruptcy (right after Preferred Shareholders) and have a residual claim on assets of the company assuming there are any left – and that’s a very large assumption.  So, the question Common Shareholders should be asking themselves is not will I get any value out of this stock through the bankruptcy, but rather what should I do with it now?

The punch line is to suggest it for bathroom wallpaper.  But beyond the minimal price you might fetch in the market today or any residual claim you might get at the end of bankruptcy, there could be some value in tax savings from the loss of your investment’s value.  For those who own Kodak stock outside of an IRA or other tax-advantaged accounts, selling the stock at such a steep loss can shield you from having to pay taxes on some gains derived from elsewhere in your portfolio.  If there are no other gains to offset, or you have exhausted your ability to offset gains and still have losses leftover, you can offset up to $3,000 per year in ordinary income.

You may elect to take advantage of these losses by selling Kodak stock at any time up until the shares stop trading.  It is important to know that you must begin to book the loss on your taxes within the calendar year that you either sell or when the stock goes to $0.00 and stops trading.  If you do not promptly report the loss on your taxes you will not be able to record the tax loss in following years.  We don’t believe Kodak’s stock will stop trading and become worthless until 2013.  If that happens in 2013 and you still hold it, then that is the year in which you must book the loss or risk forgoing the potential tax savings forever.

Regrettably, this is probably the most value you will realize from the shares have owned for years. 

For more information about the tax advantage, look for a blog to follow today from our Director of Tax & Business Services, Joe Arena.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

Kodak Shareholders: Value in a Loss

Since the Eastman Kodak bankruptcy announcement we have been getting many questions regarding the income tax impact of losses on Kodak stock.

In general, if your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately. If your total net capital loss is more than the yearly limit of $3,000, you can carry over the unused part to the next year and treat it as if you incurred the loss in that next year, and continue each year until the total loss is used.

In the case of Kodak there are two scenarios that would result in your taking a capital loss. The first scenario is if you sell your shares while they are trading in the stock market.  The second scenario would be if you held on to the shares and if the bankruptcy court decided to cancel the shares and declare them worthless.  In the first scenario you would receive a 1099 form indicating your gross proceeds from the sale and the difference between your cost basis and the proceeds would be your capital loss.  In the second scenario you are permitted to report a loss in a security equal to your tax basis in the year the security becomes completely worthless.

For many Kodak shareholders the difficult process will be calculating their cost basis as many retirees’ have accumulated shares over many years. 

As always,  you should seek professional advice before making major financial decisions.

Joe Arena
Director of Tax & Business Services
 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.